Reinsurance is a way for insurance companies to manage and spread risks. It is considered as insurance for the insurance company. Typically, an insurance company (referred to as the carrier) directly sells insurance policies to its customers. It reinsures its liability by ceding business with other companies (referred to as reinsurers). In other words, the carrier and the reinsurers share revenues and potential risks of having to pay claims, particularly claims caused by a single catastrophe (e.g., a major fire, a flood) according to some agreement (referred to as a reinsurance program).
For example, a reinsurance program can be entered into that specifies that, for a single loss event associated with a set of buildings, the carrier is responsible for the first $1 million in property damage claims, a first reinsurer is responsible for the next $4 million in property damage claims, and a second reinsurer is responsible for the next $5 million in property damage claims. This way, the set of buildings is covered by a reinsurance program of $10 million in property damage claims. As used herein, a single loss event refers to a single catastrophic event that can result in a total loss, such as a large scale natural disaster such as a fire or a tornado.
The complexity of reinsurance programs can expose the carrier to a potentially large downside. For example, with a $10 million reinsurance program, if the carrier unwittingly underwrites a $10 million policy for the building owner, and $2 million each for 5 tenants in the buildings, should a fire destroy all the buildings, the total loss would be $20 million, exceeding the limits of the reinsurance program by $10 million. The carrier alone would have to pay the excess to the insured. Since large carriers must manage a great number of policies and reinsurance programs, problems with inadequate reinsurance can be difficult to detect. Further, currently it is difficult for carriers to ascertain actual exposures across a large number of policies. Thus, an automated, scalable, and reliable way of managing reinsurance programs and insurance policies is needed.